7. Dates cannot be grown just anywhere, but conditions in southern California ar

Question

7. Dates cannot be grown just anywhere, but conditions in southern California are ideal for this purpose. Suppose there is an agricultural co-op in Palm Springs, CA that is the only supplier of dates in the U.S. Suppose the CA legislature (which has done or might do nearly anything) enacts a law placing a price ceiling on dates (i.e., imposes a maximum sales price). A disgruntled consumer writes her legislative representative and complains that this law will cause fewer dates to be grown because producers' profits will decline. Is she right?

Explanation / Answer

The answer depends on the level of price ceiling. If the price ceiling is put above the equilirium price P, where MC = MR for the single supplier, then there would be no effect of such policy on quantity, price and profits.

However, if the price celing is lower than the equilibrium price, then this would lead to a decline in prices of dates, which would lead to a decline in quantity produced and profits. As the quantity produced declines, the marginal cost is now lower than marginal revenue and the profits of the single date producer declines.

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